Blue Point Trading Market View – November 20, 2012

France the real problem in the EU? We have all heard many times before that the problem in the EU is the periphery – Greece, Portugal, Spain, Italy and Ireland. Recently this question has come up in EU debates when trying to find solutions for the current EU economic malaise. France’s industry minister, Arnaud Montebourg, has slammed a British weekly, The Economist, after it published a cover story describing the French economy as the biggest danger to Europe’s single currency. Is this true?

French President Hollande’s administration could now reform France. His party holds power in the legislature and in almost all the regions. The left should be better able than the right to persuade the unions to accept change. Hollande has acknowledged that France lacks competitiveness in a weakening economy. Yet set against the gravity of France’s economic problems, Mr Hollande still seems half-hearted.

Some of Hollande’s measures, included a 75% top income-tax rate, to which many of the French elitist will avoid to pay anyway – so all show – while increasing taxes on the middle class via consumption taxes on alcohol, fuel, tobacco and a coming proposed increase in the VAT. What Holland has mostly been doing is protecting the French banks, buy parading around Europe – promoting big EU institutions, to ensure that the nearly half trillion in French EU periphery debit can be paid bank to French banks. He knows if the EU periphery goes – France goes. He has done very little to restructure the French economy after six month in office. The French people are getting disillusioned and impatient with their new president.

But even this is not the real problem in France. The problem is its massive public sector that accounts for 57% of gross domestic product, the highest in the single-currency zone. Wow !!! This is up from just ten years ago when it was 47%. Now this is serious socialism. While the EU pushes more privatization in Greece, France is going the other way. We know from history how well centrally planned economies work out – not well. It appears now, since Hollande is incapable to propose any new economic structural reforms, France will be a drag on the EU. If the periphery does go down – France could be the final link pin that could cause a total EU collapse. This will way heavily negative on the long term out look for the Euro.